Buying properties that are in need of repair is one of the quickest ways to make money in real estate in the shortest period of time. These properties are known in the industry as “fixers-uppers,” “ugly properties,” or “junkers.” A lot of bank foreclosures, commonly called REO's (real estate owned), will also fall in this category

But beware!… There are many stories of new investors too anxious to get into a deal and paid way too much for a property. The last thing you want to do is overpay for a property and create a hemorrhage in your cashflow.

You need to understand you actually determine your profit when you purchase the property. It is easy to believe you have a bargain, and later find you wound up with a money pit because of lack of homework before making your offer.

So let us give you the 8 steps to making profits on distressed properties.

Step 1

Determine the after repaired value.

You actually have to start with the end in mind. For any property you first need to determine what you can expect the property to sell for afyer it is fully repaired. It is not as easy as on the TV show FLIP THIS HOUSE.

As your real estate brokers, we will pull data on comparables in the neighborhood. We will make sure you are comparing apples to apples. You want to compare your investment house against very similar properties.
If you have a 3 bedroom house with 1500 square feet, find at least three other houses that are similar within the same neighborhood (or a very comparable neighborhood) that have sold in the last six months.
Step 2Determine your closing costs on the purchase of the property

There can be a lot of costs when closing on a property

·Down Payment

·Appraisal

·Loan closing costs and/or points

·Home inspection
·Termite inspection

·Soil inspection (if there is an underground oil tank, etc.)
·Survey

Step 3

Determine your holding costs

A lot of investors loose profits by underestimating their holding costs. Make sure to include the following:

Add 6 mortgage payments to the holding cost budget. You want to have plenty of money set aside to repair and market the property.

Make sure to include 6 months of taxes, insurance and utility costs.

Step 4

Add up your budget for repair costs

If you are not good at estimating, get estimates from contractors. Make sure you include everything from carpet, paint and light fixtures, to plumbing electrical and landscaping. It is better to go over on your estimate than under.

Now, add 10-20% to your repair budget. You may not think you need this extra cushion, but more times than not you will end up going over budget on a rehab project.

Step 5

Determine sale costs

Now you need to determine what it will take to sell the property. Take into account your advertising and marketing budget.

Step 6

Determine closing costs on the sale of the property

In step 2 you determined the approximate closing costs on the purchase. Now determine the same thing for the sale of the property. Include any points, real estate commission, etc.

Step 7

Decide on your profit.

This is the fun part. Here is where you decide on how much money you want to make on the property. Remember, you control how much profit you make not the property. Remember, you are going to be investing a lot of time into this property so make sure it’s a figure worth your while.

You shouldn’t settle for less than $15,000 profit on a fixer-upper property. Even with all the figuring you have done, your profit can still get eaten away by unseen issues.

This is the main reason we start with the end in mind. Look at this as a math formula. Leave your emotions behind. When you get solve the formula you know what you can afford to pay for a property.

Step 8

Determine the most you can pay for the property.

Now we are ready to determine what we can afford to pay for the property.

Simply take your predetermined after-repaired-value and subtract the following:

closing costs on purchase

holding costs

repair costs

sale costs

closing costs on sale

your profit

What you are left with is the MOST you can afford to pay for the property and still make the profit you seek.

This formula takes a little time, but the more offers you make, the better you will become at compiling the data.